Home buyers cringe when a loan officer mentions PMI (Private Mortgage Insurance) and that the buyer may need it. But, the existence of PMI has also helped many people, particularly first time home buyers, purchase real estate. So what exactly is it, you ask? PMI is extra insurance many lenders require if your mortgage loan amount exceeds 80%of the fair market value (FMV) of your new home. Along with the obvious reason, the extra risk created by an equity position of less than 20%, many secondary market buyers of mortgage loans will not purchase loans if the loan-to-value (LTV) is higher than 80% of the appraised value at the time of closing.

Here's how this insurance helps protect your lender from loss: You borrow $250,000 and your home is worth $275,000. You get PMI which “covers” the balance above 80% LTV, ($220,000), leaving $30,000 over 80% LTV that is “exposed.” Should you default on your loan and require the lender to foreclose, the PMI company would pay your lender the portion of the $30,000 they insure less the amount the lender recovers, if any, at the foreclosure sale.

You can cancel PMI coverage once the mortgage balance on your home drops below 80% of the current value of your property. If you want to cancel this coverage before you pay your balance down to 80% or less of your FMV at time of closing the loan, you will need an independent appraisal showing that your home has appreciated to a level that makes your loan balance less than 80% of the FMV. While borrowers dislike paying for PMI, many would be unable to purchase homes without PMI being available. Be aware that you must have an excellent payment history with your mortgage lender to cancel your PMI. If you are 30 or more days behind in your payments, your lender and the PMI company will refuse to cancel your insurance for reasons that should be obvious; the insurance is in place to protect the lender should you default.

Ever wonder how you could make your life better and more fun? So have tens of millions of fans who have turned to LifeTips for answers over the past decade. We keep the tips, advice, books, podcasts and writing services flowing, so you can keep your life and business growing in the right direction. Upward!